An In-Depth Overview of Merchant Processing Fees

Nearly every business needs merchant processing services, and they’ll inevitably deal with the complications that come with it. Among the most significant problems that affect your business’s bottom line is the issue of merchant processing fees.

As a loyal payment processing company, our goal at Payment Nerds is to help businesses like yours succeed by navigating the complex maze of merchant and credit card processing fees.

In this article, we give you an in-depth breakdown of everything you should know about merchant fees — what they are, why they’re important, ways you can reduce them, and much more. Let’s get started.

 

What are Merchant Processing Fees?

Merchant processing fees are the costs your business receives when accepting electronic card payments from customers via credit or debit cards. These fees come from the many processes that occur when transferring from a customer’s account to your merchant account.

Merchant processing fees are usually charged by the payment processor, card network, or other financial institution that processes these transactions. These entities apply a range of different merchant processing fees, all of which pay for the infrastructure that ensures your business can accept electronic forms of payment.

While there are many different fees, the ones you receive can vary depending on the payment processor, the transaction type, and the card networks involved.

 

The Importance of Knowing Merchant Processing Fees Explained

So what makes knowing about all these fees so important?

Let’s consider that debit and credit card processing fees earned $224 billion in 2024 ^[1]. These types of fees make up a large portion of a company’s payment processing fees, along with many others.

This means numerous businesses were and continue to be influenced by the enormous cost of their debit and credit card transaction fees. Below, we share some important reasons to learn about merchant processing fees so they don’t hurt your business:

 

Effects On Your Pricing

Merchant fees are another cost among many for your business. To cover them, you’ll either have to use a portion of your profits or pass them on to your customers by raising prices for your products or services. Knowing everything about your merchant processing fees ensures you make the right choices on how to cover their cost while also weighing your brand reputation among customers.

 

Room for Negotiation

Some fees can’t change, like interchange fees from card networks like Visa and Mastercard. However, you can work with some of your payment processors to adjust other fees, like transaction or merchant account fees. Knowing how payment processors determine the total charge of your fees can help you justify a more feasible rate for your business.

 

Finding What Fits Your Business

Card networks and payment processors often charge different amounts for fees depending on the type of card, transaction amount, and merchant industry. A good example is lower interchange fees for debit cards than credit cards because debit purchases are less risky ^[2].

Knowing these differences can allow you to set up your ideal payment methods with customers so they can help reduce the frequency of processing fees, saving them and you money in the long run.

 

Pricing Models of Merchant Service Fees

 

Flat-Rate Pricing

A flat-rate pricing model charges a fixed fee for every transaction and a fixed percentage of the transaction, regardless of the type of card used or the amount spent. This makes the payment processing fee simpler and easier to predict and account for. Rates for this model reach between 2.5% to 3.5% plus 30 cents per transaction ^[3].

 

Interchange-Plus Pricing

The interchange-plus pricing model is simply the rate of a card network’s interchange fees plus a small markup fee. The fee includes a comparably small percentage of the transaction and a few cents, usually somewhere between 0.10% plus 5 cents to 0.50% plus 25 cents per transaction, depending on the sale type ^[3].

 

Tiered Pricing

Using a tiered pricing model involves separating prices into different tiers depending on different factors, such as if purchases are debit or credit card transactions, the volume of transactions being processed, and whether the transaction is in-person or online.

Based on these different aspects, processing fees break into qualified, mid-qualified, or non-qualified tiers, each one more expensive than the last. Compared to other pricing models, this type can be more complex and difficult to understand unless you really know the criteria of each tier.

 

Key Merchant Fees to Factor In

In addition to the merchant processing service price models you’ll encounter, there are numerous other card network, bank, and merchant processing fees to consider. Here are most of the ones you should become familiar with:

 

Transaction fees

We mentioned these in our discussions about different pricing models, but to clarify, transaction fees are charged for every transaction your business has processed by your merchant processing service. These usually include a percentage of the sale amount plus a flat fee. 

For example, a payment processor charges 0.10% plus 5 cents per transaction, so for a payment of $100, the percentage fee would be $10, plus the flat fee of five cents would make a total of $10.05 to process.

Percentages differ based on the card a customer uses, whether the transaction is online or in-person, and the particular pricing model of your payment processor.

 

Interchange fees

In addition to transaction fees, we also mentioned interchange fees, which are set by credit card networks like Visa and Discover and are charged by the issuing bank to your acquiring bank, who would then charge your business. These fees compensate for the risk of a cardholder’s payment, covering fraud prevention, processing costs, and more.

 

Chargeback fees

When a customer disputes a transaction made on their card or device, their issuing bank reverses payments made to the payment processor. The processor then imposes chargeback fees on the merchant to cover the cost of investigating the dispute and potentially fighting the customer’s chargeback request.

 

Setup fees

A one-time charge occurs when a business opens a merchant account with a payment processor. The payment processor can then create the account and potentially integrate its payment gateways with the business’s eCommerce website or point-of-sale system.

 

Termination fees

Also called ‘early termination fees,’ these are charged to a merchant who ends their contract with a payment processor earlier than it is stated on the contract terms. This is meant to repay the payment processor for the cost of onboarding and servicing your business’s merchant account.

Some payment processors may not charge this fee if you switch to another processor in the same network, or they may terminate your contract to negotiate better terms.

 

Monthly fees

This is simply a monthly fee your merchant processing provider will charge on your business’s merchant account. It can include costs for customer service, account management, and access to reporting and fraud prevention tools. The fee is meant to cover the cost of maintaining your account and the technology the payment processor provides you have access to.

 

Same-day fees

Better known as ‘expedited funding fees,’ these are additional charges for receiving funds from processed transactions on the same day rather than the standard period of settlement, which is one to three days. The fee is usually a percentage of the transaction amount, but it could be a flat fee.

Some payment processors only provide this to merchants that regularly have a high number of transactions within a given period. The fee compensates your merchant processing provider for speeding up the transaction settlement period and giving you access to funds sooner.

 

Assessment fees

These are other fees placed by card networks to maintain their payment infrastructure. They’re usually a very small percentage, around 0.13% to 0.15% of the transaction amount. They help pay for networks to update security protocols and payment technologies, as well as ensure compliance with regulations.

 

Negotiate fees with merchant service providers

Companies with a long sales history and high transaction volumes can negotiate with their merchant processing service provider. So, if you’ve had a positive and lengthy relationship with your payment process, try to discuss reducing your fees.

 

Set a minimum amount for card transactions

While it may lead to a few more customer service complaints, setting a minimum purchase amount for card transactions can do two things. First, it helps limit the number of customers who use debit or credit cards as a form of payment. Additionally, the minimum ensures your customers’ purchases help cover the cost of your payment processing fees.

 

Incentivize cash or debit card payments

Debit cards usually have lower transaction and processing fees than credit cards, while cash payments have none. Encourage your customers to forgo paying with credit cards by providing discounts or other rewards for paying with cash or debit.

 

Reduce the number of chargebacks

Create clear purchase policies, implement effective fraud prevention strategies, and provide exceptional customer service to ensure your business eliminates customer chargebacks. Lowering the number of chargeback fees through these methods can greatly reduce payment processing costs.

 

Review merchant account fees

Make sure your finance team reviews your merchant account and payment processing statements. Check for sudden increases in particular fees or new and unexpected ones. Also, examine them for potential errors or undisclosed changes to your fee structure.

 

Try processing fees during off-peak times

Certain payment processors charge lower fees when you process your transactions during off-peak hours. You can do this by batch-processing customer card transactions — this is when businesses process transactions altogether at a later time rather than when they occur. While it may mean funds take longer to get to your business’s accounts, the savings may be worth it.

 

Invest in modern POS and payment systems

Make sure your business has modern payment systems in place. They are faster, more accessible, easier to use, and provide valuable insights into your customers and sales performance.

Integrating modern Point-of-Sale and payment gateways also allows you to utilize alternative payment methods, including digital wallets and bank transfers, reducing or eliminating processing fees for more customer transactions.

 

Conclusion

Merchant processing fees are the cost of accepting electronic payments. These fees greatly influence customers, so much so that families across the U.S. paid at least $1,102 in these fees, at least in 2023, and the costs are only increasing over time ^[5]. Merchant processing fees also greatly affect your business, forcing you to either reduce your profit margins or charge customers more for your products or services.

There are ways to reduce these fees, but it all starts with you knowing about them. It also involves looking to work with a merchant processing service that wants to provide reliable processing services at a feasible rate. At Payment Nerds, we want to help companies by providing better, more streamlined payment processing. Contact us to learn how we can help.